New North Sea tax regime aims to boost production

An extra 2bn barrels of oil that would otherwise been left under the North Sea
may now be extracted under new measures unveiled in the Budget.

By Garry White

10:31PM BST 22 Apr 2009

Oil and gas companies operating in the UK Continental Shelf (UKCS) are to receive tax breaks to encourage exploration activity in smaller, more technically challenging fields that would otherwise not be viable.

Currently, companies that produce oil and gas from the UKCS are subject to corporation tax of 30pc plus a supplementary tax of 20pc. New fields given development consent will now have a "field allowance" which can be offset against this supplementary tax charge. Once this is exhausted the company will revert back to the full tax regime, with the speed of exhaustion of allowances depending on the profitability of the company.

Industry body Oil & Gas UK welcomed the move, but said that further action was needed to help existing fields with production. Malcolm Webb, OGUK's chief executive, said: "We now need to direct our attention to sustaining and promoting investment in and around many of our older fields to prolong their lives, to stimulating exploration activity and to opening up the frontier areas west of Shetland."

The Government also plans to make changes to the ring-fence corporation tax rules that will allow decommissioning costs to be carried back against profits to 2002 – even if the use of the oil and gas field is being changed.

The move is intended to encourage the development of gas storage and carbon capture facilities under the North Sea. Under previous rules, these losses could only be carried back for three years.

Energy group Centrica welcomed the changes. Nick Luff, finance director, said: "The announcements complement HM Revenue and Custom's clarification on Tuesday of additional support for the development of new gas storage in the UK."